My Company

When first suggesting to financial advisors that they make 401(k) plans a growth engine for their business, I often feel like Ralphie asking Santa Clause for a Red Ryder BB Gun for Christmas. Instead of telling me that I will shoot my eye out, most often, their response will be:

401(k) plans are not profitable for financial advisors

Our firm is too small to handle 401(k) plans

We lack the required knowledge to compete effectively.

The 401(k) market is overcrowded already

Plans sponsors have no loyalty to their 401(k) advisor.

These misconceptions have been fostered by those advisors who have had negative experiences when prospecting plan sponsors or whom partnered with 401(k) providers who lacked the capabilities necessary to position the advisor as an expert in the eyes of the plan sponsor. Need I not forget the time when I witnessed two retirement wholesalers wrestling on the ground, culminating with one of the young bucks scolding the others face with hot coffee. You can probably infer from this incident that the financial advisors, who brought these two retirement wholesalers with them, were not chosen to takeover the plan. The misconceptions mentioned above no longer hold true in most cases. As more advisors begin to understand the benefits of targeting this market, the quicker these misconceptions will fade away.

The 401(k) marketplace offers fee-based financial advisors the opportunity to significantly increase their assets under management. Advisors seeking to double or triple their assets within a period of 12 to 18 months can most effectively do so, by targeting 401(k) plans. Due to advances in technology, the increased robustness of investment platforms and the expertise of plan administrators, the barriers of entry into this marketplace are low, provided an advisor partners with the right firms. Moreover, recent surveys of plan sponsors clearly show us how great this opportunity actually is for advisors:

Seventy-five percent of 401(k) plans with less than $50 million in plan assets go through a financial advisor

Seventy-five percent of the business owners who sponsor a 401(k) plan are actively looking to cut the costs of their current plan.

Greater than 80 percent of plan participants are unaware of the fees associated with their 401(k) account.

Seventy-seven percent of plan participants claim to be totally lost when it comes to selecting investment options with their respective plans.

Areas of importance

The business owner needs to be aware of all of the fees being charged to the plan and its participants. There are 17 possible fees that can be associated with a 401(k) plan. There are few business owners aware of more than two or three types of fees. Moreover, business owners should not assume that their current vendor has made them aware of all the fees associated with their plan, even if it is their brother-in-law. Class action lawsuits have already been brought upon firms such as Caterpillar, Nokia Corp and Sterling Bank (WA). It is likely to be a matter-of-time when these lawsuits start to trickle down to smaller companies.

By choosing and monitoring investments such as variable sub-accounts, exchange-traded funds and mutual funds, the plan sponsor is establishing themselves as a fiduciary.

By selecting and monitoring third party service providers such as third party administrators, advisors and investment programs they are establishing themselves as a fiduciary.

Many business owners who sponsor 401(k) plans hold onto the belief that by hiring a financial advisor to select and monitor investments, they have relieved themselves of their fiduciary obligation to their plan. This is not the case, leading to many business owners being unaware of the litigation risk they're incurring.

The only way for a plan sponsor (business owner) to outsource their fiduciary obligation is by hiring an investment advisor registered under the Investment Advisor Act of 1940 who acknowledge in writing that it is a fiduciary with regards to the plan. The second hot button that financial advisors should hit upon with plan sponsors is the fees associated with their respective plan. In total, there are 17 fees that can be charged to a 401(k) plan. Most plan sponsors are completely unaware of the fees they are paying. As part of their fiduciary obligation, he or she must be aware and understand all the fees associated with their plan. What we are seeing right now while conducting plan reviews is the average 401(k) plan is paying approximately 3 percent in fees. Retirement plans in existence for five or longer that also have variable annuities as the underlying investments are being charged in upwards of 5 percent per year. In a flat market these fees are hard to justify, especially when there are 401(k) vendors that can provide these companies with better features at half-the-cost.
The points to touch upon with 401(k) plan sponsors are clear: Fiduciary obligation and reducing costs.

The advisors that I see having success at bringing in 401(k) plans approach plan sponsors by offering a free plan assessment, comparing their current plan with other providers in the marketplace. It is a plans sponsor's fiduciary obligation to do perform a plan review every 12 months anyway. By bringing this to their attention, the advisor is not only building trust but also starting to show how they can add value.

One of the most important aspects of this entire process is partnering with an investment platform and plan administration provider than can position the advisor as an expert in the mind of the plan sponsor. This holds true whether an advisor is just starting to target retirement plans or they already have 100 plans under management.

Choosing vendors

When choosing an investment platform provider there are numerous things to evaluate; however in my experience, it is best to focus on the following:

Does the investment provider have the ability to take on the fiduciary obligation of this plan?

Do they offer individual investment policy statements for each participant?

Do they have the technology to help participants sign up via online?

Is a risk tolerance questionnaire provided to participants to create their allocation?

Do the asset allocation models based on the risk tolerance questionnaire provide hyper diversification?

The second step in choosing vendors is to look for those who have established relationships with experienced plan sponsors. The administration aspect of fiduciary obligation is often overlooked. If the investment platform has a relationship in place with an administrator (turnkey model), it may significantly reduce the plan sponsors fiduciary obligation with regards to the handling of plan assets. This is because the investment management platform has recommended the plan administrator to utilize.

Approaching plan sponsors as a consultant, who is looking to reduce their fiduciary obligation and litigation risk, has proven to be an effective way to win 401(k) plans.
It is now time for the final presentation. The investment platform provider along with the plan administration provider should be able to provide the financial advisor with a compelling plan comparison, which can be presented to the plan sponsor. In an attempt to add value, there are plan administrators who are willing to get on a conference call with the advisor and plan sponsor. When this occurs, the probability of the advisor becoming the advisor on that plan is high.

The most important point for financial advisors to remember is that the 401(k) marketplace is one of the greatest opportunities out there for opportunistic advisors looking for ways to significantly increase their assets under management. Additional points to remember include:

These 401(k) plans can be a profitable part of an advisors business given they partner with right vendors

Advisors do not need to be experts on retirement plans to be successful in this marketplace

There are hundreds of thousands of existing plans, which are underserved by their current advisor.

Business owners are not aware of their fiduciary obligation to the extent they should.

Most retirement plans, especially those under $10 million in assets are paying enormous fees which takes a serious toll on participant accounts

401(k) participants need to be educated on the investment choices available to them.

About the Author

I am the Co-Founder of the Alternative Investment Store, a division of Benjamin & Jerold Brokerage I LLC based in New York, NY. My role I have more than 14 years of experience in the investment industry, managing financial outcomes for business owners.
Since 2001, I have represented some of ... More